Negotiations for purchase price allocation between a seller and buyer are important, especially knowing the significant price of real property. Therefore, it is logical to negotiate on each component of a real property.

Its importance stems from how it will directly impact how gain is recognized at a different tax rate. Some of you may know a tax rule called “depreciation recapture”. This is the method through which the government reacquires the tax benefits you have accumulated from all past years; it happens when the property is eventually sold. For those who are not familiar with the depreciation rule, it is a non-cash expense that the government gives you to incentivize you to invest in real estate.

Keep in mind, when you sell a real property with a significant depreciation taken in the past years, it is crucial to reach an agreement with your buyer on the allocation of asset components so the taxes can be minimized.